Telehealth stocks are obviously fertile ground for growth investors at the moment. Telehealth adoption was going to expand regardless, but was accelerated by the novel coronavirus pandemic. Companies with exposure to the trend have massive opportunities.
There are two concerns, however. First, those opportunities aren’t exactly hidden. Telehealth names – particularly the sector’s largest player – are among the market’s biggest winners so far in 2020. To at least some extent, the market has priced in the potential growth.
Second, there simply aren’t that many pure-play providers in the sector. That adds another layer to valuation concerns: the combination of high demand and limited supply generally leads to higher prices.
That said, companies posting strong growth in attractive markets raced past valuation concerns in recent years. And the long-term opportunity for telehealth remains vast. There’s a case for waiting for a pullback, or at least some caution. But sector bulls should hone in on these three telehealth stocks:
3 Telehealth Stocks: Teladoc Health (TDOC)
The simplest way to play telehealth is to own the biggest player in the U.S. market. That’s Teladoc Health.
Teladoc is even bigger now. On Oct. 30, its merger with Livongo Health closed. The tie-up combines Teladoc’s telehealth capabilities with Livongo’s existing base of users managing chronic conditions like diabetes and hypertension (high blood pressure).
Strategically, the combination seems like a perfect fit. Indeed, at the time the merger was announced, Teladoc forecast $500 million in “revenue synergies” from the deal by 2025. In other words, the combined company should have an incremental $500 million in sales, thanks to cross-selling opportunities between the two platforms. Against trailing 12-month revenue for Teladoc under $900 million, that’s an obviously huge opportunity.
Valuation is a bit of a concern – but not to the extent that the 135% year-to-date rally in TDOC stock might suggest. Shares trade at about 14x next year’s revenue estimate. That’s not cheap, certainly. But it’s not unreasonable. The combined company expects to grow revenue 30%-plus annually for several years post-merger. And, like fellow pandemic winner Zoom Video Communications (NASDAQ:ZM), profit margins should be solid.
Despite the bull case, TDOC shares actually stalled for several months now, and still trade below levels reached before the merger was announced. It’s possible that more optimism toward a resolution of a pandemic leads to further near-term weakness. But it’s at least equally possible that the flattish trading created an attractive long-term opportunity.
American Well (AMWL)
To be honest, I’m not completely sold on AMWL stock just yet. In mid-October, I called it one of seven recent initial public offerings that investors should ditch. Investors willing to pay up for U.S. telehealth stocks should at least consider paying up for the highest-quality name, which for now appears to be TDOC.
But AMWL pulled back about 20% since I recommended against it, which brings valuation in, to at least some extent. And at a better (though not yet compelling) price, there is an intriguing case here. American Well’s growth has been impressive. The market opportunity – Teladoc has estimated its addressable market at $121 billion – is big enough for multiple winners. And there’s at least a possibility that the integration of the Teladoc-Livongo merger will provide an opening for smaller Amwell (as it’s often known) to take share.
At 22x forward revenue, I’d still like to see a pullback. But, again, there aren’t a ton of pure-play telehealth stocks to choose from. The post-IPO chart does look better with some recent buying after a steady retreat. At the least, if Amwell can deliver on its promise, AMWL stock should have upside from here.
Investors looking for teleheath stocks can also look overseas to Japan, where M3 has become a global leader in telehealth. Backed by Sony (NYSE:SNE), the company began as a traditional operator of medical websites. (In 2002, for instance, it acquired the Japanese subsidiary of WebMD.) It’s used acquisitions to become a worldwide player in online medical information and telehealth.
Unlike Teladoc and Amwell, M3 isn’t a pure-play. Much of its revenue still comes from providing information to patients, doctors and academics. But M3 is also nicely profitable, and huge, with a market capitalization more than $60 billion.
Even with profits, valuation is a concern, as M3 stock has been on a tear, more than tripling over the past year. But the gains make sense. M3’s existing capabilities and worldwide reach should make it a big winner in telehealth – and maybe even the best of the telehealth stocks going forward.
On the date of publication, Vince Martin did not have (either directly or indirectly) any positions in the securities mentioned in this article.
After spending time at a retail brokerage, Vince Martin has covered the financial industry for close to a decade for InvestorPlace.com and other outlets.